For most of my career, many professional investors have tried to avoid resources because of their high volatility and poor long-term returns.
The recent performance of BHP, particularly against the banks, is a timely reminder that it is best treated as a trading stock only.
However we must be close to one of these times. Having not owned any BHP since selling out at $48, I’m fishing for the bottom at the moment and last week bought some BHPKME. This is a “mini-long” warrant issued by Macquarie that is traded on the ASX. It has a current strike price of $29.8211 and a stop price of $31.27. If BHP merely touches $31.27 in a single trade the warrant is stopped out and you receive back only the net proceeds of the difference of the strike and stop prices less any costs in the issuer selling their hedge. In extremes of trading (for example opening much lower) the whole amount invested can be lost so this only be done with small amounts.
However the warrant price rises 1:1 with the stock price so getting it right can be very rewarding, particularly if it’s the beginning of a sustained recovery. For example, with the stock up at $32.70 today the warrant is $2.88. A move back up to its 31 January high of $39.34 would see the warrant get back over its old high of $8.40.
I’m looking for a more modest mean reversion move in this month back up to its daily moving average of about $34.50. That would still give an exit price of about $4.80 for the warrant, a nice little earner.
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John Aldersley is the CIO of AldersleyCapital, a “tax-aware” investment manager of separately managed accounts within the Phillip Managed Accounts. He can be contacted by email to john.aldersley@aldersleycapital.com or by visiting www.aldersleycapital.com. |
